Nep1 (Emg1) is a highly conserved nucleolar protein with an essential function in ribosome biogenesis. A mutation in the human Nep1 homolog causes Bowen–Conradi syndrome—a severe developmental disorder. Structures of Nep1 revealed a dimer with a fold similar to the SPOUT-class of RNA-methyltransferases suggesting that Nep1 acts as a methyltransferase in ribosome biogenesis. The target for this putative methyltransferase activity has not been identified yet. We characterized the RNA-binding specificity of Methanocaldococcus jannaschii Nep1 by fluorescence- and NMR-spectroscopy as well as by yeast three-hybrid screening. Nep1 binds with high affinity to short RNA oligonucleotides corresponding to nt 910–921 of M. jannaschii 16S rRNA through a highly conserved basic surface cleft along the dimer interface. Nep1 only methylates RNAs containing a pseudouridine at a position corresponding to a previously identified hypermodified N1-methyl-N3-(3-amino-3-carboxypropyl) pseudouridine (m1acp3-Psi) in eukaryotic 18S rRNAs. Analysis of the methylated nucleoside by MALDI-mass spectrometry, HPLC and NMR shows that the methyl group is transferred to the N1 of the pseudouridine. Thus, Nep1 is the first identified example of an N1-specific pseudouridine methyltransferase. This enzymatic activity is also conserved in human Nep1 suggesting that Nep1 is the methyltransferase in the biosynthesis of m1acp3-Psi in eukaryotic 18S rRNAs.